ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively herein as “ALJ” or “Company”) is a holding company. During the three and nine months ended June 30, 2021 and June 30, 2020, ALJ consisted of the following wholly-owned subsidiaries:
|
•
|
Faneuil, Inc. (including its subsidiaries, “Faneuil”). Faneuil is a leading provider of call center services, back-office operations, staffing services, and toll collection services to government and commercial clients across the United States, focusing on the healthcare, utility, consumer goods, toll and transportation industries. Faneuil is headquartered in Hampton, Virginia. ALJ acquired Faneuil in October 2013.
|
|
•
|
Phoenix Color Corp. (including its subsidiaries, “Phoenix”). Phoenix is a leading manufacturer of book components, educational materials and related products producing value-added components, heavily illustrated books and specialty commercial products using a broad spectrum of materials and decorative technologies. Phoenix is headquartered in Hagerstown, Maryland. ALJ acquired Phoenix in August 2015.
|
|
•
|
Floors-N-More, LLC, d/b/a, Carpets N’ More (“Carpets”). Carpets is one of the largest floor covering retailers in Las Vegas, Nevada, and a provider of multiple products for the commercial, retail and home builder markets including all types of flooring, countertops, cabinets, window coverings and garage/closet organizers, with one retail location, as well as a stone and solid surface fabrication facility. ALJ acquired Carpets in April 2014. ALJ sold Carpets during February 2021. See Basis of Presentation below.
|
As a result of selling one of its segments during February 2021, discussed below, ALJ has organized its business and corporate structure into two business segments: Faneuil and Phoenix.
Basis of Presentation
In January 2021, ALJ entered into a Purchase and Sale Agreement (“PSA”), by and among the Company, Superior Interior Finishes, LLC, a Nevada limited liability company (“Purchaser” or “Superior”) and Carpets, pursuant to which the Company agreed to sell 100% of the membership interests of Carpets to the Purchaser for an aggregate purchase price of $0.5 million (the “Purchase Price”) in cash (the “Transaction”). At the time of the PSA, Superior was 100% owned by Steve Chesin, the Chief Executive Officer of Carpets. The Company entered into the PSA because its Carpets business segment had been deemed a non-core holding and had underperformed over the past several years. The Transaction, which was approved by a committee of the Board comprised solely of certain independent directors of the Company, closed in February 2021. As such, the results of operations, assets, liabilities, and cash flows of Carpets were classified as discontinued operations in ALJ’s financial statements for all periods presented. See Note 4 for additional information about the divestiture of Carpets.
The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The Condensed Consolidated Financial Statements and footnotes thereto are unaudited. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the Company’s interim financial results. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue and expenses that are reported in the Condensed Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. Interim financial results are not necessarily indicative of financial results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC on December 18, 2020.
Impact of Coronavirus Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the U.S. COVID-19 is having an unprecedented impact on the U.S. economy as federal, state, and local governments react to this public health crisis.
Since the beginning of the COVID-19 pandemic, all of ALJ’s subsidiaries have been deemed “Essential Services” and have continued to operate with limited disruption. To date, COVID-19 has not materially impacted ALJ’s financial position, results of operations or cash flows. The Company took immediate actions in March 2020 to enable working-from-home where possible and put in place increased safety precautions, including social distancing, at other locations where essential services on site are required. The duration
9
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
of these measures is unknown, may be extended and additional measures may be imposed. Although some employees have recently started to return to work, ALJ still has a significant portion of its work force working from home.
Although ALJ has not been materially impacted by COVID-19, ALJ could be impacted by COVID-19 in the near term by lower sales volumes in several parts of ALJ’s business, resulting in lower revenue and profit. While the impact of COVID-19 on the Company’s future financial position, results of operations and cash flows cannot be estimated with certainty, such impact could be significant if the global pandemic continues to adversely impact the U.S. economy for an extended period of time. The extent to which COVID-19 impacts ALJ’s operations will depend on future developments, which are highly uncertain. These include among others, the duration of the outbreak, vaccination rate, emergence of new variants, if portions of the Company’s business segments are recharacterized as non-essential for which closure of some or all of the Company’s operations could be required, information that may emerge concerning the severity of COVID-19 and the actions, especially those taken by governmental authorities, to contain the pandemic or treat its impact. As events are rapidly developing, additional impacts may arise that are not known at this time.
As of June 30, 2021, ALJ’s total available liquidity was $37.6 million, which included $8.4 million of cash and cash equivalents and $29.2 million of unused borrowing capacity under the Company’s revolving credit facility. While the impact that COVID-19 may have on the Company’s financial position, results of operations, and cash flows in the future cannot be estimated with certainty, based on current estimates regarding the magnitude and duration of the global pandemic, ALJ does not anticipate an impact on the Company’s ability to meet its obligations when due for at least the next 12 months. However, the ultimate magnitude and duration of the global pandemic is highly uncertain and, as such, will require ALJ to continually assess the situation for the foreseeable future. Accordingly, the Company’s estimates regarding the magnitude and duration of the global pandemic may change in the future and such changes could be material.
2. RECENT ACCOUNTING STANDARDS
Accounting Standards Adopted
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU 2016-02, Leases and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (referred to collectively as “ASC 842”)). ASC 842 requires lessees to recognize a right-of-use (“ROU”) asset and corresponding lease liability for all leases with terms of more than 12 months and provides enhanced disclosure of lease activity. Recognition, measurement, and presentation of expenses depend on classification as either a finance or operating lease.
ALJ adopted ASC 842 as of October 1, 2020, the effective and initial application date, using the modified retrospective approach. Comparative periods presented in the consolidated financial statements prior to October 1, 2020 continue to be presented under Accounting Standards Codification (“ASC”) 840. ALJ elected the package of practical expedients, which allowed the Company to not reassess, as of the adoption date, whether arrangements contain leases, the classification of existing leases, and the capitalization of initial direct costs of the existing leases. The Company also made a policy election to exclude leases with an initial term of 12 months or less from the Consolidated Balance Sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The Company’s October 1, 2020 adoption of ASC 842 resulted in the recognition of operating lease obligations totaling $42.6 million, based upon the present value of the remaining minimum rental payments using discount rates as of the adoption date, of which $5.2 million was in operating lease obligations - current installments, and $37.4 million was in operating lease liabilities, less current installments. In addition, ALJ recorded corresponding operating lease right-of-use assets totaling $33.4 million. The new standard did not have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. See Note 10 for further discussion of the Company’s leasing arrangements and required ASC 842 disclosures.
10
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies certain aspects of the accounting for income taxes as well as clarifies and amends existing guidance to improve consistent application. ALJ early adopted ASU 2019-12 as of January 1, 2021. The impact of ASU 2019-12 on ALJ’s consolidated financial statements and related disclosures was not material.
Accounting Standards Not Yet Adopted
Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to provide guidance on implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU 2018-15 aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, ASU 2018-15 amends ASC 350, Intangibles–Goodwill and Other, to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in such a CCA. ASU 2018-15 will be effective for ALJ on October 1, 2021. ALJ does not anticipate the adoption of ASU 2018-15 to significantly impact its consolidated financial statements and related disclosures.
Debt with Conversion and Other Options
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 will be effective for ALJ on October 1, 2021 and will be applied on a full retrospective basis. ALJ does not anticipate the adoption of ASU 2020-06 to significantly impact its consolidated financial statements and related disclosures.
Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. ASU 2021-04 will be effective for ALJ on October 1, 2022. ALJ does not anticipate the adoption of ASU 2021-04 to significantly impact its consolidated financial statements and related disclosures.
3. REVENUE RECOGNITION
Disaggregation of Revenue
Revenue by contract type was as follows for the three and nine months ended June 30, 2021 and June 30, 2020:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended
June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Faneuil:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
$
|
31,318
|
|
|
$
|
22,119
|
|
|
$
|
108,020
|
|
|
$
|
71,474
|
|
Transportation
|
|
|
22,614
|
|
|
|
14,926
|
|
|
|
64,324
|
|
|
|
50,422
|
|
Utility
|
|
|
13,709
|
|
|
|
13,509
|
|
|
|
40,529
|
|
|
|
40,926
|
|
Government
|
|
|
4,148
|
|
|
|
9,166
|
|
|
|
26,698
|
|
|
|
10,796
|
|
Other
|
|
|
965
|
|
|
|
1,803
|
|
|
|
3,576
|
|
|
|
5,297
|
|
Total Faneuil
|
|
$
|
72,754
|
|
|
$
|
61,523
|
|
|
$
|
243,147
|
|
|
$
|
178,915
|
|
Phoenix:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publisher
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSA
|
|
$
|
24,588
|
|
|
$
|
20,337
|
|
|
$
|
67,555
|
|
|
$
|
52,336
|
|
Non-MSA
|
|
|
3,652
|
|
|
|
1,200
|
|
|
|
11,522
|
|
|
|
11,982
|
|
11
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSA
|
|
|
—
|
|
|
|
239
|
|
|
|
93
|
|
|
|
1,424
|
|
Non-MSA
|
|
|
2,466
|
|
|
|
2,778
|
|
|
|
6,868
|
|
|
|
7,589
|
|
Total Phoenix
|
|
$
|
30,706
|
|
|
$
|
24,554
|
|
|
$
|
86,038
|
|
|
$
|
73,331
|
|
Total consolidated revenue, net
|
|
$
|
103,460
|
|
|
$
|
86,077
|
|
|
$
|
329,185
|
|
|
$
|
252,246
|
|
Substantially all of Faneuil revenue is recognized over time and substantially all of Phoenix revenue is recognized at a point in time.
Contract Assets and Liabilities
The following table provides information about consolidated contract assets and contract liabilities on June 30, 2021 and September 30, 2020:
(in thousands)
|
|
June 30,
2021
|
|
|
September 30,
2020
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
Unbilled revenue (1)
|
|
$
|
885
|
|
|
$
|
527
|
|
Total contract assets
|
|
$
|
885
|
|
|
$
|
527
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
6,054
|
|
|
$
|
10,875
|
|
Accrued rebates and material rights (2)
|
|
|
2,865
|
|
|
|
3,097
|
|
Total contract liabilities
|
|
$
|
8,919
|
|
|
$
|
13,972
|
|
(1)
|
Included in prepaid expenses and other current assets. Unbilled revenue represents rights to consideration for services provided when the right is conditioned on something other than passage of time (for example, meeting a milestone for the right to bill under the cost-to-cost measure of progress). Unbilled revenue is transferred to accounts receivable when the rights become unconditional.
|
(2)
|
Included in accrued expenses.
|
The following table provides changes in consolidated contract assets and contract liabilities during the nine months ended June 30, 2021:
(in thousands)
|
|
Contract
Assets
|
|
|
Contract
Liabilities
|
|
Balance, September 30, 2020
|
|
$
|
527
|
|
|
$
|
13,972
|
|
Additions to contract assets
|
|
|
1,806
|
|
|
|
—
|
|
Transfer from contract assets to accounts receivable
|
|
|
(1,448
|
)
|
|
|
—
|
|
Revenue recognized
|
|
|
—
|
|
|
|
(13,773
|
)
|
Accrued rebates
|
|
|
—
|
|
|
|
3,747
|
|
Payment of rebates
|
|
|
—
|
|
|
|
(3,979
|
)
|
Cash received from customer
|
|
|
—
|
|
|
|
8,952
|
|
Balance, June 30, 2021
|
|
$
|
885
|
|
|
$
|
8,919
|
|
12
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Deferred Revenue and Remaining Performance Obligations
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from call center services, including non-refundable payments made prior to operations. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. Customers are typically invoiced for these agreements in regular installments and revenue is recognized ratably over the contractual service period. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter. Deferred revenue does not represent the total contract value of annual or multi-year non-cancellable agreements.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, not to receive financing from customers. Any potential financing fees are considered de minimis.
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue. Transaction price allocated to the remaining performance obligation is influenced by several factors, including the timing of renewals and average contract terms. The Company applied practical expedients to exclude amounts related to performance obligations that are billed and recognized as they are delivered, optional purchases that do not represent material rights, and any estimated amounts of variable consideration that are subject to constraint in accordance with the new revenue standard.
The Company has elected to apply the optional exemption for the disclosure of remaining performance obligations for contracts that have an original expected duration of one year or less, are billed and recognized as services are delivered and/or variable consideration allocated entirely to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. This primarily consists of call center services that are billed monthly based on the services performed each month.
Costs to Obtain a Contract
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The costs to obtain a contract capitalized under the new revenue standard are primarily sales commissions paid to our sales force personnel. Capitalized costs may also include portions of fringe benefits and payroll taxes associated with compensation for incremental costs to acquire customer contracts and incentive payments to partners. These costs are amortized over the term of the contract or the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. The Company expenses sales commissions when incurred if the amortization period of the sales commission is one year or less. The accounting for incremental costs of obtaining a contract with a customer is consistent with the accounting under previous guidance.
During the nine months ended June 30, 2021, the Company capitalized $0.1 million of costs to obtain a contract. During the nine months ended June 30, 2021, the Company amortized $0.4 million of these costs, which was included in selling, general, and administrative expense. The net book value of costs to obtain a contract was $0.3 million as of June 30, 2021, of which $0.2 million was in prepaid expenses and other current assets, and $0.1 million was in other assets.
Costs to Fulfill a Contract
The Company also capitalizes costs incurred to fulfill its contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to cost of revenue as the Company satisfies its performance obligations by transferring the service to the customer. These costs are amortized on a systematic basis over the expected period of benefit.
During the nine months ended June 30, 2021, the Company capitalized $6.0 million of costs to fulfill a contract. The amortization of costs to fulfill contracts, which comprise set-up/transition activities, for the nine months ended June 30, 2021 was $7.6 million. The net book value of the costs to fulfill a contract as of June 30, 2021, was $3.5 million of which $2.9 million was in prepaid expenses and other current assets, and $0.6 million was in other assets.
Capitalized costs to obtain and fulfill a contract are periodically reviewed for impairment. ALJ did not incur any impairment losses during the nine months ended June 30, 2021 or June 30, 2020.
13
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. ACQUISITIONS AND DIVESTITURES
RDI Acquisition
On July 31, 2019 (“RDI Purchase Date”), Faneuil acquired Realtime Digital Innovations, LLC (“RDI” and such acquisition, the “RDI Acquisition”), a provider of workflow automation and business intelligence services. The RDI Acquisition is expected to provide Faneuil with a sustainable competitive advantage in the business process outsourcing space by allowing it to, among others, (i) automate process workflows and business intelligence, (ii) generate labor efficiencies for existing programs, (iii) expand potential new client target entry points, (iv) improve overall customer experience, and (v) increase margin profiles through shorter sales cycles and software license sales.
The aggregate cash consideration for the RDI Acquisition paid at closing was $2.5 million, with earn-outs up to $7.5 million to be paid upon the achievement of certain financial metrics over a three-year period, subject to a guaranteed payout of $2.5 million. In March 2021, Faneuil made the first earn-out payment of $2.5 million. The RDI Acquisition was not material to the Company's results of operations, financial position, or cash flows and, therefore, the pro forma impact is not presented.
The following schedule reflects the final fair value of assets acquired and liabilities assumed on the RDI Purchase Date (in thousands):
|
|
Purchase Price
|
|
Balance Sheet Caption
|
|
Allocation
|
|
Total current assets
|
|
$
|
53
|
|
Fixed assets
|
|
|
11
|
|
Identified intangible assets:
|
|
|
|
|
Technology
|
|
|
3,400
|
|
Non-compete agreements
|
|
|
1,300
|
|
Goodwill (1)
|
|
|
2,675
|
|
Total assets
|
|
|
7,439
|
|
Accrued expenses
|
|
|
(39
|
)
|
Fair value of deferred and contingent consideration (2)
|
|
|
(4,900
|
)
|
Cash paid at closing
|
|
$
|
2,500
|
|
(1)
|
Goodwill was fully impaired and written off in March 2020.
|
(2)
|
On June 30, 2021, the remaining maximum payment was $5.0 million. On June 30, 2021, the fair value of deferred and contingent consideration was $4.6 million, of which $2.4 million was included in accrued expenses and $2.2 million was included in other non-current liabilities on the Condensed Consolidated Balance Sheet. The original maximum payment was $7.5 million.
|
Fair Value Adjustment of Deferred and Contingent Consideration Liabilities
The fair value of the deferred and contingent consideration liabilities is remeasured to fair value at each reporting period using Level 3 inputs such as cash flow forecast, discount rate, and equity risk premium. The change in fair value, including accretion for the passage of time, is recognized in earnings until the deferred and contingent considerations are resolved. ALJ recorded a $1.1 million and a $0.9 million increase to deferred and contingent consideration liabilities during the three months ended June 30, 2021 and June 30, 2020, respectively, which was expensed to selling, general, and administrative expense.
14
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Acquisition-Related Expenses
During the nine months ended June 30, 2020, the Company incurred less than $0.1 million of acquisition-related expenses in connection with the RDI Acquisition, which were expensed to selling, general, and administrative expense. There were no acquisition-related expenses incurred during any other periods presented.
Carpets Divestiture
As previously discussed in Note 1, ALJ sold Carpets during February 2021. As a result, ALJ recognized a loss on sale of $0.8 million during the nine months ended June 30, 2021, calculated as follows:
(in thousands)
|
|
|
|
|
Cash proceeds
|
|
$
|
500
|
|
Net assets sold
|
|
|
(1,199
|
)
|
Transaction costs
|
|
|
(62
|
)
|
Impact of income taxes
|
|
|
—
|
|
Total loss on sale
|
|
$
|
(761
|
)
|
The carrying value of the net assets sold, at the time of closing, were as follows:
(in thousands)
|
|
|
|
|
Current assets
|
|
$
|
4,615
|
|
Intangible assets, net
|
|
|
318
|
|
Other long-term assets
|
|
|
740
|
|
Current liabilities
|
|
|
(4,099
|
)
|
Long-term liabilities
|
|
|
(375
|
)
|
Net assets sold
|
|
$
|
1,199
|
|
The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations on September 30, 2020:
|
|
September 30,
|
|
|
|
2020
|
|
Assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
2,874
|
|
Inventories, net
|
|
|
1,221
|
|
Prepaid expenses and other current assets
|
|
|
733
|
|
Property and equipment, net
|
|
|
598
|
|
Intangible assets, net
|
|
|
335
|
|
Other long-term assets
|
|
|
51
|
|
Total assets of discontinued operations
|
|
$
|
5,812
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
1,946
|
|
Accrued expenses
|
|
|
1,172
|
|
Other current liabilities
|
|
|
233
|
|
Total long-term liabilities
|
|
|
606
|
|
Total liabilities of discontinued operations
|
|
$
|
3,957
|
|
15
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents information regarding certain components of loss from discontinued operations for the three and nine months ended June 30, 2021 and June 30, 2020:
|
|
Three Months Ended
June 30,
|
|
|
Nine Months Ended
June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net revenue
|
|
$
|
—
|
|
|
$
|
9,277
|
|
|
$
|
13,799
|
|
|
$
|
29,599
|
|
Operating income (loss)
|
|
|
—
|
|
|
|
(461
|
)
|
|
|
(302
|
)
|
|
|
(3,323
|
)
|
Loss on sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(761
|
)
|
|
|
—
|
|
Loss before income taxes
|
|
|
—
|
|
|
|
(461
|
)
|
|
|
(1,063
|
)
|
|
|
(3,324
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
(461
|
)
|
|
|
(1,063
|
)
|
|
|
(3,324
|
)
|
The following table presents significant components of cash flows of discontinued operations for the nine months ended June 30, 2021 and June 30, 2020:
|
|
Nine Months Ended
June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
$
|
—
|
|
|
$
|
2,555
|
|
Depreciation and amortization expense
|
|
|
199
|
|
|
|
421
|
|
Provision for bad debt and obsolete inventory
|
|
|
27
|
|
|
|
41
|
|
Gain on disposal of assets, net
|
|
|
—
|
|
|
|
6
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
399
|
|
|
|
816
|
|
Inventories, net
|
|
|
(12
|
)
|
|
|
88
|
|
Prepaid expenses, collateral deposits, and other current assets
|
|
|
24
|
|
|
|
(300
|
)
|
Other assets and liabilities, net
|
|
|
26
|
|
|
|
236
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(7
|
)
|
|
|
(25
|
)
|
5. CONCENTRATION RISKS
Cash
The Company maintains its cash balances in accounts, which, at times, may exceed federally insured limits. The Company has not experienced any loss in such accounts and believes there is little exposure to any significant credit risk.
Major Customers and Accounts Receivable
ALJ did not generate net revenue from any one customer in excess of 10% of consolidated net revenue. Each of ALJ’s segments had customers that represent more than 10% of their respective net revenue, as described below.
Faneuil. The percentages of Faneuil net revenue derived from its significant customers were as follows:
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
|
2020
|
|
Customer A
|
|
**
|
|
**
|
|
|
11.8
|
%
|
|
|
11.4
|
%
|
Customer B
|
|
**
|
|
**
|
|
**
|
|
|
|
10.1
|
|
**
|
Less than 10% of Faneuil net revenue.
|
16
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounts receivable from significant customers during the three or nine months ended June 30, 2021 totaled $6.6 million on June 30, 2021. As of June 30, 2021, all Faneuil accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.
Phoenix. The percentages of Phoenix net revenue derived from its significant customers were as follows:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Customer A
|
|
|
25.5
|
%
|
|
|
21.5
|
%
|
|
|
23.3
|
%
|
|
|
24.9
|
%
|
Customer B
|
|
|
24.9
|
|
|
|
24.2
|
|
|
|
23.0
|
|
|
|
19.1
|
|
Customer C
|
|
|
12.0
|
|
|
|
10.8
|
|
|
|
12.2
|
|
|
|
11.5
|
|
Accounts receivable from significant customers during the three or nine months ended June 30, 2021 totaled $3.7 million on June 30, 2021. As of June 30, 2021, all Phoenix accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to most customers.
Supplier Risk
ALJ has only one segment, Phoenix, that purchases inventory. Phoenix had suppliers that represented more than 10% of both Phoenix inventory purchases and consolidated ALJ inventory purchases as follows:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Supplier A
|
|
|
15.7
|
%
|
|
|
17.6
|
%
|
|
|
19.2
|
%
|
|
|
15.5
|
%
|
Supplier B
|
|
|
11.4
|
|
|
|
17.4
|
|
|
|
12.0
|
|
|
|
17.7
|
|
Supplier C
|
|
|
10.0
|
|
|
|
10.0
|
|
|
**
|
|
|
**
|
|
**
|
Less than 10% of both Phoenix inventory purchases and consolidated ALJ inventory purchases.
|
If these suppliers were unable to provide materials on a timely basis, Phoenix management believes alternative suppliers could provide the required supplies with minimal disruption to the business.
6. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Accounts Receivable, Net
The following table summarizes accounts receivable at the end of each reporting period:
|
|
June 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Accounts receivable
|
|
$
|
52,364
|
|
|
$
|
57,478
|
|
Unbilled receivables
|
|
|
391
|
|
|
|
42
|
|
Accounts receivable
|
|
|
52,755
|
|
|
|
57,520
|
|
Less: allowance for doubtful accounts
|
|
|
(154
|
)
|
|
|
(1,033
|
)
|
Accounts receivable, net
|
|
$
|
52,601
|
|
|
$
|
56,487
|
|
17
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Inventories, Net
The following table summarizes inventories at the end of each reporting period:
|
|
June 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Raw materials
|
|
$
|
4,794
|
|
|
$
|
4,260
|
|
Semi-finished goods/work in process
|
|
|
1,755
|
|
|
|
1,923
|
|
Finished goods
|
|
|
83
|
|
|
|
96
|
|
Inventories
|
|
|
6,632
|
|
|
|
6,279
|
|
Less: allowance for obsolete inventory
|
|
|
(32
|
)
|
|
|
(47
|
)
|
Inventories, net
|
|
$
|
6,600
|
|
|
$
|
6,232
|
|
Property and Equipment
The following table summarizes property and equipment at the end of each reporting period:
|
|
June 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Machinery and equipment
|
|
$
|
39,057
|
|
|
$
|
33,783
|
|
Leasehold improvements
|
|
|
30,849
|
|
|
|
30,843
|
|
Computer and office equipment
|
|
|
22,610
|
|
|
|
19,630
|
|
Building and improvements
|
|
|
16,874
|
|
|
|
16,896
|
|
Software
|
|
|
16,533
|
|
|
|
16,483
|
|
Land
|
|
|
9,267
|
|
|
|
9,267
|
|
Furniture and fixtures
|
|
|
7,749
|
|
|
|
7,749
|
|
Construction and equipment in process
|
|
|
1,018
|
|
|
|
—
|
|
Vehicles
|
|
|
360
|
|
|
|
356
|
|
Property and equipment
|
|
|
144,317
|
|
|
|
135,007
|
|
Less: accumulated depreciation and amortization
|
|
|
(77,081
|
)
|
|
|
(67,222
|
)
|
Property and equipment, net
|
|
$
|
67,236
|
|
|
$
|
67,785
|
|
Property and equipment depreciation and amortization expense, including amounts related to finance leased assets, was $3.7 million and $3.5 million for the three months ended June 30, 2021 and June 30, 2020, respectively, and $11.1 million and $10.7 million for the nine months ended June 30, 2021 and June 30, 2020, respectively.
Intangible Assets
The following tables summarize identified intangible assets at the end of each reporting period:
|
|
|
|
|
|
|
June 30, 2021
|
|
(in thousands)
|
Weighted
Average
Original Life
(Years)
|
|
Weighted
Average
Remaining Life
(Years)
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer relationships
|
12.0
|
|
|
5.7
|
|
|
$
|
33,590
|
|
|
$
|
(17,921
|
)
|
|
$
|
15,669
|
|
Trade names
|
27.6
|
|
|
22.4
|
|
|
|
10,240
|
|
|
|
(2,505
|
)
|
|
|
7,735
|
|
Supply agreements
|
10.2
|
|
|
9.1
|
|
|
|
9,690
|
|
|
|
(4,996
|
)
|
|
|
4,694
|
|
Technology
|
8.0
|
|
|
6.1
|
|
|
|
3,400
|
|
|
|
(815
|
)
|
|
|
2,585
|
|
Non-compete agreements
|
6.6
|
|
|
4.3
|
|
|
|
1,550
|
|
|
|
(517
|
)
|
|
|
1,033
|
|
Totals
|
|
|
|
|
|
|
$
|
58,470
|
|
|
$
|
(26,754
|
)
|
|
$
|
31,716
|
|
18
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
September 30, 2020
|
|
(in thousands)
|
Weighted
Average
Original Life
(Years)
|
|
|
Weighted
Average
Remaining Life
(Years)
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer relationships
|
|
12.0
|
|
|
6.4
|
|
$
|
33,590
|
|
|
$
|
(15,818
|
)
|
|
$
|
17,772
|
|
Trade names
|
27.6
|
|
|
23.0
|
|
|
10,240
|
|
|
|
(2,209
|
)
|
|
|
8,031
|
|
Supply agreements
|
10.2
|
|
|
9.1
|
|
|
9,690
|
|
|
|
(4,059
|
)
|
|
|
5,631
|
|
Technology
|
8.0
|
|
|
6.8
|
|
|
3,400
|
|
|
|
(496
|
)
|
|
|
2,904
|
|
Non-compete agreements
|
6.6
|
|
|
5.1
|
|
|
1,550
|
|
|
|
(336
|
)
|
|
|
1,214
|
|
Totals
|
|
|
|
|
|
|
$
|
58,470
|
|
|
$
|
(22,918
|
)
|
|
$
|
35,552
|
|
Intangible asset amortization expense was $1.3 million for both the three months ended June 30, 2021 and June 30, 2020, and $3.8 million and $3.9 million for the nine months ended June 30, 2021 and June 30, 2020, respectively.
The following table presents expected future amortization expense for the remainder of Fiscal 2021 and yearly thereafter:
(in thousands)
|
|
Estimated
Future
Amortization
|
|
Fiscal 2021 (remaining)
|
|
$
|
1,105
|
|
Fiscal 2022
|
|
|
4,596
|
|
Fiscal 2023
|
|
|
4,596
|
|
Fiscal 2024
|
|
|
4,457
|
|
Fiscal 2025
|
|
|
4,144
|
|
Thereafter
|
|
|
12,818
|
|
Total
|
|
$
|
31,716
|
|
19
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accrued Expenses
The following table summarizes accrued expenses at the end of each reporting period:
|
|
June 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Accrued compensation and related taxes
|
|
$
|
12,290
|
|
|
$
|
9,660
|
|
Rebates payable
|
|
|
2,865
|
|
|
|
3,097
|
|
Acquisition contingent consideration
|
|
|
2,400
|
|
|
|
2,500
|
|
Legal
|
|
|
1,600
|
|
|
|
—
|
|
Other
|
|
|
1,410
|
|
|
|
352
|
|
Medical and benefit-related payables
|
|
|
1,233
|
|
|
|
1,438
|
|
Accrued board of director fees
|
|
|
522
|
|
|
|
130
|
|
Interest payable
|
|
|
136
|
|
|
|
674
|
|
Deferred lease incentives
|
|
|
—
|
|
|
|
1,289
|
|
Total accrued expenses
|
|
$
|
22,456
|
|
|
$
|
19,140
|
|
Workers’ Compensation Reserve
The Company is self-insured for certain workers’ compensation claims as discussed below. The current portion of workers’ compensation reserve is disclosed with accrued expenses. The non-current portion of workers’ compensation reserve is disclosed with other non-current liabilities.
Faneuil. Faneuil is self-insured for workers’ compensation claims up to $500,000 per incident. Reserves have been provided for workers’ compensation based upon insurance coverages, third-party actuarial analysis, and management’s judgment.
Phoenix. Phoenix maintains a fully insured plan for workers’ compensation claims.
7. LOSS PER SHARE
The following table summarizes basic and diluted loss per share of common stock for each period presented:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
(in thousands, except per share amounts)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net loss from continuing operations
|
|
$
|
(3,504
|
)
|
|
$
|
(2,198
|
)
|
|
$
|
(4,643
|
)
|
|
$
|
(65,410
|
)
|
Net loss from discontinued operations,
net of income taxes
|
|
|
—
|
|
|
|
(461
|
)
|
|
|
(1,063
|
)
|
|
|
(3,324
|
)
|
Net loss
|
|
$
|
(3,504
|
)
|
|
$
|
(2,659
|
)
|
|
$
|
(5,706
|
)
|
|
$
|
(68,734
|
)
|
Loss per share of common stock–basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(0.08
|
)
|
|
|
(0.05
|
)
|
|
|
(0.11
|
)
|
|
|
(1.55
|
)
|
Discontinued operations
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
(0.08
|
)
|
Loss per share (1)
|
|
|
(0.08
|
)
|
|
|
(0.06
|
)
|
|
|
(0.13
|
)
|
|
|
(1.63
|
)
|
Weighted average shares of common stock outstanding–
basic and diluted
|
|
|
42,321
|
|
|
|
42,173
|
|
|
|
42,320
|
|
|
|
42,173
|
|
Anti-dilutive shares excluded from loss
per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
11,158
|
|
|
|
10,486
|
|
|
|
11,158
|
|
|
|
10,486
|
|
Employee stock option grants
|
|
|
1,355
|
|
|
|
1,804
|
|
|
|
1,355
|
|
|
|
1,804
|
|
Warrants
|
|
|
2,908
|
|
|
|
2,908
|
|
|
|
2,908
|
|
|
|
2,908
|
|
Total
|
|
|
15,421
|
|
|
|
15,198
|
|
|
|
15,421
|
|
|
|
15,198
|
|
(1) Amounts may not add due to rounding.
ALJ computed basic loss per share of common stock using net loss divided by the weighted-average number of shares of common stock outstanding during the period. As a result of recognizing net loss for all periods presented, basic and diluted loss per share are the same.
20
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. DEBT
ALJ’s components of debt and the respective interest rate at the end of each reporting period were as follows:
|
|
June 30, 2021
|
|
|
September 30, 2020
|
|
(in thousands)
|
|
Interest
Rate
|
|
|
Balance
|
|
|
Interest
Rate
|
|
|
Balance
|
|
Line of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended PNC Revolver
|
|
|
5.25
|
%
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
Amended PNC Revolver LIBOR
|
|
|
4.00
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Cerberus/PNC Revolver
|
|
|
|
|
|
|
—
|
|
|
|
13.25
|
%
|
|
|
4,417
|
|
Cerberus/PNC Revolver LIBOR
|
|
|
|
|
|
|
—
|
|
|
|
11.00
|
|
|
|
10,000
|
|
Less: deferred loan costs
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
(664
|
)
|
Line of credit, net of deferred loan costs
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
13,753
|
|
Current portion of term loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of Blue Torch Term Loan
|
|
|
8.50
|
|
|
$
|
3,800
|
|
|
|
|
|
|
$
|
—
|
|
Current portion of Cerberus Term Loan
|
|
|
|
|
|
|
—
|
|
|
|
8.25
|
|
|
|
8,200
|
|
Current portion of equipment financing
|
|
|
|
|
|
|
—
|
|
|
|
2.66
|
|
|
|
1,999
|
|
Less: deferred loan costs
|
|
|
|
|
|
|
(1,125
|
)
|
|
|
|
|
|
|
(372
|
)
|
Current portion of term loans, net of deferred loan costs
|
|
|
|
|
|
$
|
2,675
|
|
|
|
|
|
|
$
|
9,827
|
|
Term loans, less current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blue Torch Term Loan, less current portion
|
|
|
8.50
|
|
|
$
|
91,200
|
|
|
|
|
|
|
$
|
—
|
|
Convertible Promissory Notes
|
|
|
8.25
|
|
|
|
6,026
|
|
|
|
|
|
|
|
—
|
|
Cerberus Term Loan, less current portion
|
|
|
|
|
|
|
—
|
|
|
|
8.25
|
|
|
|
62,336
|
|
Term B Loan
|
|
|
|
|
|
|
—
|
|
|
|
12.25
|
|
|
|
4,415
|
|
Term C Loan
|
|
|
|
|
|
|
—
|
|
|
|
8.25
|
|
|
|
5,782
|
|
Equipment financing, less current portion
|
|
|
|
|
|
|
—
|
|
|
|
2.66
|
|
|
|
1,611
|
|
Less: deferred loan costs
|
|
|
|
|
|
|
(3,039
|
)
|
|
|
|
|
|
|
(662
|
)
|
Term loans, less current portion, net of deferred loan costs
|
|
|
|
|
|
$
|
94,187
|
|
|
|
|
|
|
$
|
73,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total line of credit and term loans
|
|
|
|
|
|
$
|
96,862
|
|
|
|
|
|
|
$
|
97,062
|
|
Activity, as described in the paragraphs below, impacting ALJ’s debt for the nine months ended June 30, 2021 was as follows:
(in thousands)
|
|
Total
Line of
Credit
|
|
Blue
Torch
Term
Loan
|
|
|
Convertible
Promissory
Notes
|
|
|
Cerberus
Term
Loan
|
|
|
Term B
Loan
|
|
|
Term C
Loan
|
|
|
Equipment
Financing
|
|
|
Deferred
Loan
Costs
|
|
|
Total
|
|
Balance, September 30, 2020
|
|
$
|
14,417
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70,536
|
|
|
$
|
4,415
|
|
|
$
|
5,782
|
|
|
$
|
3,610
|
|
|
$
|
(1,698
|
)
|
|
$
|
97,062
|
|
Payments, net
|
|
|
(5,943
|
)
|
|
—
|
|
|
|
—
|
|
|
|
(4,100
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,417
|
)
|
|
|
—
|
|
|
|
(11,460
|
)
|
Interest expense and other bank fees
accreted to term loans
|
|
|
258
|
|
|
—
|
|
|
|
—
|
|
|
|
642
|
|
|
|
422
|
|
|
|
244
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,566
|
|
New equipment financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,750
|
|
|
|
|
|
|
|
3,750
|
|
Amortization of deferred loan costs
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
527
|
|
|
|
527
|
|
Balance, June 29, 2021 prior to debt
transactions
|
|
|
8,732
|
|
|
—
|
|
|
|
—
|
|
|
|
67,078
|
|
|
|
4,837
|
|
|
|
6,026
|
|
|
|
5,943
|
|
|
|
(1,171
|
)
|
|
|
91,445
|
|
Impacts from June 29, 2021 debt
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing debt payoff and other fees
|
|
|
(8,732
|
)
|
|
—
|
|
|
|
—
|
|
|
|
(67,078
|
)
|
|
|
(4,837
|
)
|
|
|
—
|
|
|
|
(6,056
|
)
|
|
|
—
|
|
|
|
(86,703
|
)
|
New debt
|
|
|
—
|
|
|
95,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,164
|
)
|
|
|
90,836
|
|
Transfer of debt
|
|
|
—
|
|
|
—
|
|
|
|
6,026
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,026
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss on debt extinguishment
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
1,171
|
|
|
|
1,284
|
|
Balance, June 30, 2021
|
|
$
|
—
|
|
$
|
95,000
|
|
|
$
|
6,026
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4,164
|
)
|
|
$
|
96,862
|
|
21
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Description of Debt Obligations Entered into During the Three Months Ended June 30, 2021
New Term Loan
On June 29, 2021, ALJ replaced its existing term loan and Term B Loan under the Cerberus/PNC Financing Agreement (each as defined below) by entering into a new term loan (“Blue Torch Term Loan”) with Blue Torch Business Finance, LLC for an aggregate under the total principal amount of $95.0 million. ALJ completed the transaction primarily to:
|
•
|
Refinance its existing term loans;
|
|
•
|
Extend the maturity date from November 2023 to June 2025;
|
|
•
|
Update certain financial covenants to align with projected results of operation;
|
|
•
|
Repay certain capitalized leases and all equipment financing arrangements; and
|
|
•
|
Improve liquidity and operating flexibility.
|
The Blue Torch Term Loan, which matures on June 29, 2025, requires annual principal payments of $3.8 million paid in equal quarterly installments on the last business day of each fiscal quarter.
The Blue Torch Term Loan bears interest at a floating rate of interest per year based on the London Interbank Offered Rate (“LIBOR”), subject to a minimum of 1.75% per year, plus an applicable margin of 6.75% per year.
The Blue Torch Term Loan is secured by substantially all the Company’s assets, includes customary representations, warranties and covenants, including, among other things, restrictions on ALJ’s ability to incur additional indebtedness, dispose of assets, incur liens, make investments, pay dividends or other distributions, and enter into certain transactions with their affiliates, in each case subject to specified exceptions.
The Blue Torch Term Loan has a prepayment penalty of 3%, 2%, and 1% of the outstanding principal balance if ALJ prepays the loan during year one, year two, and year three, respectively.
Amendment and Restatement of Existing Facility
In connection with the Blue Torch Term Loan, ALJ amended and restated in its entirety the Cerberus/PNC Financing Agreement (as defined below, and as amended and restated, the “Amended PNC Revolver”). The Cerberus/PNC Financing Agreement had two lenders, PNC Bank NA (“PNC”) and Cerberus Business Finance, LLC (“Cerberus”). As part of the Amended PNC Revolver, Cerberus was paid in full (“Cerberus Payoff”) using proceeds from the Blue Torch Term Loan.
The Amended PNC Revolver provides for a total of $32.5 million, which includes (i) revolving borrowings, and (ii) the issuance of letters of credit. The letters of credit have a sublimit of $15.0 million. The Amended PNC Revolver matures June 29, 2025.
Amounts outstanding under the Amended PNC Revolver bear interest at a floating rate of interest per year based on (i) the highest of (a) 2.75% per year, (b) the Federal Funds Open Rate plus 0.50% per year, (c) the LIBOR plus 1.00% per year, or (d) the prime lending rate of PNC, plus (ii) an applicable margin. The applicable margin is either 2.00% or 3.00% per year depending on whether or not ALJ meets certain debt covenant criteria as defined in the Amended PNC Revolver, respectively.
Under the Amended PNC Revolver, ALJ has the ability to lock into a lower rate for a fixed period of time, e.g. one month, for a fixed amount of borrowings under the Amended PNC Revolver. This lower rate is the LIBOR, subject to a minimum of 1.00% per year, plus an applicable margin of 3.00% per year.
The Amended PNC Revolver is secured by substantially all the Company’s assets, includes customary representations, warranties and covenants, including, among other things, restrictions on ALJ’s ability to incur additional indebtedness, dispose of assets, incur liens,
22
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
make investments, pay dividends or other distributions, and enter into certain transactions with their affiliates, in each case subject to specified exceptions.
The Amended PNC Revolver has a prepayment penalty of 1%, 0.5%, and 0.25% of the total outstanding commitment, $32.5 million, if ALJ prepays the loan during year one, year two, and year three, respectively.
On June 30, 2021, ALJ had an unused borrowing capacity of $29.2 million.
Issuance of Convertible Promissory Notes
In connection with the Cerberus Payoff, on June 29, 2021, ALJ issued convertible promissory notes in an aggregate principal amount of $6.0 million (the “Convertible Promissory Notes”) to two investors, including ALJ’s Chief Executive Officer and Chairman of the Board, Jess Ravich. The Convertible Promissory Notes replace and have substantially the same terms as ALJ’s prior Term C Loan (as defined below), except the Convertible Promissory Notes pay interest quarterly and the Term C Loan paid interest at maturity.
The Convertible Promissory Notes accrue interest at the rate of 8.25% per year, compounded monthly with interest payable in cash quarterly in arrears on the last day of each calendar quarter on the outstanding principal balance until such principal amount is paid in full or until conversion. The principal and accrued interest owed under the Convertible Promissory Notes are convertible, at the option of the holders, into shares of the Company’s common stock, at any time prior to November 28, 2023, at a conversion price equal to the equal to the quotient of all amounts due under each Convertible Promissory Note divided by the conversion rate of $0.54 per common share.
The Convertible Promissory Notes are (i) subordinate to the Blue Torch Term Loan and the Amended PNC Revolver, (ii) unsecured, and (iii) have a maturity date of November 28, 2023, subject to extension under certain circumstances.
Loss on Debt Extinguishment
The loss on debt extinguishment recorded during the three months ended June 30, 2021 was comprised of the following (in thousands):
(in thousands)
|
|
|
|
|
Deferred loan costs from Cerberus/PNC Financing Agreement
|
|
$
|
1,171
|
|
Prepayment penalties from Cerberus/PNC Financing Agreement
|
|
|
716
|
|
Prepayment penalties from equipment financing agreements, capital leases, and other
|
|
|
185
|
|
Total loss on debt extinguishment
|
|
$
|
2,072
|
|
Financial Covenant Compliance
The Blue Torch Term Loan and the Amended PNC Revolver include certain financial covenants. As of June 30, 2021, ALJ was in compliance with all financial covenants.
23
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Estimated Future Minimum Principal Payments
Estimated future minimum principal payments for the Blue Torch Term Loan and the Convertible Promissory Notes are as follows (in thousands):
Year Ending June 30,
|
|
Blue Torch
Term Loan
|
|
|
Convertible
Promissory Notes
|
|
|
Total
|
|
2022
|
|
$
|
3,800
|
|
|
$
|
—
|
|
|
$
|
3,800
|
|
2023
|
|
|
3,800
|
|
|
|
—
|
|
|
|
3,800
|
|
2024
|
|
|
3,800
|
|
|
|
6,026
|
|
|
|
9,826
|
|
2025*
|
|
|
83,600
|
|
|
|
—
|
|
|
|
83,600
|
|
Total
|
|
$
|
95,000
|
|
|
$
|
6,026
|
|
|
$
|
101,026
|
|
*The majority of this amount is the final balloon payment due on June 29, 2025.
Description of Historical Debt Obligations Entered into During Prior Reporting Periods
All of the debt described below was paid off in full on June 29, 2021 (“Payoff Date”). The disclosure is included to provide a historical perspective of ALJ’s debt prior to the Payoff Date.
Term Loan and Line of Credit
In August 2015, ALJ entered into a financing agreement (“Cerberus/PNC Financing Agreement”) with Cerberus, to borrow $105.0 million in a term loan (“Cerberus Term Loan”) and have available up to $32.5 million in a revolving loan (“Cerberus/PNC Revolver,” and together with the Cerberus Term Loan, “Cerberus/PNC Debt”). ALJ subsequently entered into nine amendments to the Cerberus/PNC Financing Agreement, of which four were executed during the period covered by this report and described below. The Cerberus/PNC Debt maturity date was November 28, 2023 (“Cerberus/PNC Debt Maturity Date”).
Sixth Amendment to the Cerberus/PNC Financing Agreement
In December 2019, ALJ entered into the Sixth Amendment (“Sixth Amendment”) to the Cerberus/PNC Financing Agreement. The Sixth Amendment amended certain terms and covenants in order to support the continued growth of the Company, as summarized below:
|
•
|
Converted $4.1 million in aggregate principal amount from the Cerberus Term Loan to a new term loan (referred to hereafter as “Term B Loan”) as discussed in more detail below;
|
|
•
|
Adjusted the leverage ratio;
|
|
•
|
Decreased the fixed charge coverage ratio; and
|
|
•
|
Increased the interest rate floor for LIBOR rate loans from 1.0% to 1.50% per year and for Prime rate loans from 3.25% to 4.75% per year.
|
Additionally, the Sixth Amendment added a deleveraging fee (“Deleveraging Fee”), of which the first payment was made on March 31, 2020, and the second payment was due on June 30, 2020 unless one or more persons purchased a $2.5 million participating interest in the Cerberus Term Loan prior to June 30, 2020. The first payment was expensed to selling, general, and administrative expense. As a result of the Ninth Amendment (see Ninth Amendment to the Cerberus/PNC Financing Agreement below), the second payment was not required by Cerberus.
Seventh Amendment to the Cerberus/PNC Financing Agreement
In February 2020, ALJ entered into the Seventh Amendment (“Seventh Amendment”) to the Cerberus/PNC Financing Agreement to temporarily increase the Cerberus/PNC Revolver borrowing capacity as follows:
|
•
|
Extended the seasonal increase period, originally through February 14, 2020, to March 15, 2020, during which the available borrowing limit under the Cerberus/PNC Revolver was $32.5 million; and
|
|
•
|
Increased the available borrowing limit under the Cerberus/PNC Revolver from $25.0 million to $30.0 million for the period from March 16, 2020 to March 31, 2020.
|
24
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Eighth Amendment to the Cerberus/PNC Financing Agreement
In March 2020, ALJ entered into the Eighth Amendment (“Eighth Amendment”) to the Cerberus/PNC Financing Agreement to amend certain terms and covenants, which included:
|
•
|
Removed the seasonal decreases in the available borrowing limit under the Cerberus/PNC Revolver such that the amount available to borrow thereunder remains $32.5 million through the Cerberus/PNC Debt Maturity Date;
|
|
•
|
Adjusted certain quarterly principal payment obligations;
|
|
•
|
Adjusted payment terms on the interest payable on the Term B Loan, from a mixture of cash and payable in kind to 100% payable in kind, until the Term A Loan is paid in full; and
|
|
•
|
Added a monthly fee of $0.1 million, from the period April 1, 2020 through the Cerberus/PNC Debt Maturity Date, which amounts were added to the Cerberus Term Loan, accrued interest at the Cerberus Term Loan rate, and was paid as part of the Cerberus Payoff.
|
Ninth Amendment to the Cerberus/PNC Financing Agreement
As a result of the decline in ALJ’s actual and forecasted results of operations, including the potential effects of COVID-19, ALJ sought an easement of certain debt covenants and the elimination of certain quarterly principal payment obligations under the Cerberus/PNC Financing Agreement.
In May 2020, ALJ entered into the Ninth Amendment (“Ninth Amendment”) to the Cerberus/PNC Financing Agreement. The Ninth Amendment amended certain terms and covenants as summarized below:
|
•
|
Increased the interest rate from LIBOR plus 6.75% per year to LIBOR plus 9.50% per year on the LIBOR portion of the Cerberus/PNC Revolver, an increase of 2.75% per year;
|
|
•
|
Increased the interest rate from Prime plus 5.75% per year to Prime plus 8.50% per year on the Prime portion of the Cerberus/PNC Revolver, an increase of 2.75% per year;
|
|
•
|
Eliminated or reduced certain quarterly principal payment obligations;
|
|
•
|
Excluded amounts outstanding under the Term B Loan and Term C Loan (see “Amendment to the Junior Participation Agreements – Term C Loan” below) from the leverage ratio calculation; and
|
|
•
|
Adjusted the leverage ratio threshold and the fixed charge coverage ratio.
|
Junior Participation Agreement – Term B Loan and Warrants Issued
In December 2019, in connection with the Sixth Amendment, certain trusts and other entities formed for the benefit of, or otherwise affiliated with Mr. Ravich (“Ravich Entities”), entered into a Junior Participation Agreement with Cerberus (“Junior Participation Agreement”), pursuant to which the Ravich Entities agreed to purchase $4.1 million in junior participation interests in the Term B Loan under the Cerberus/PNC Financing Agreement (“Junior Participation” and such interests, “Junior Participation Interests”). The Junior Participation Interests were junior and subordinate to the Cerberus Term Loan in all respects and had no quarterly payments. Through March 2020, interest accrued under the Junior Participation (i) in cash, accrued at the same rate per year as the Cerberus Term Loan and paid monthly, and (ii) in kind, accrued at 4.00% per year, payable on the Cerberus/PNC Debt Maturity Date. See “Amendment to Junior Participation Agreement -Term B Loan and Warrants Issued” below for interest earned subsequent to March 2020.
In connection with the Junior Participation, the Company issued fully vested warrants to purchase 1.23 million shares of the Company’s common stock (“Junior Participation Agreement Warrants”) to the Ravich Entities, with a five-year term and an exercise price equal to the lesser of the 30-day trailing average closing price of the Company’s common stock as traded on the Nasdaq Stock Market on (i) December 17, 2019 or (ii) six months from December 17, 2019. The 30-day trailing average closing price of the Company’s common stock on December 17, 2019 was $1.20. The 30-day trailing average closing price of the Company’s common stock on June 17, 2020 was $0.54.
The fair value of the Junior Participation Agreement Warrants was calculated using the Black Scholes Model with the following assumptions: contractual life of five years, volatility of 42.3%, dividend yield of 0.00%, and annual risk-free interest rate of 1.7%. The fair value of the Junior Participation Agreement Warrants of $0.6 million was expensed to selling, general, and administrative
25
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
expense in June 2020.
Amendment to Junior Participation Agreement – Term B Loan and Warrants Issued
In March 2020, in connection with the Eighth Amendment to the Cerberus/PNC Financing Agreement, the Ravich Entities entered into the First Amendment to the Junior Participation Agreement (“First Amendment to Junior Participation Agreement”). The amended terms under the First Amendment to Junior Participation Agreement include:
|
•
|
Interest earned on Term B Loan was 100% paid in kind, at a rate equal to the Cerberus Term Loan plus 4.00%, until the Cerberus Term Loan was paid in full, instead of paid in a mixture of cash and in kind; and
|
|
•
|
Interest earned on the Backstop Letter Agreement (see “Backstop Letter Agreement” discussion below), was paid 100% in kind until Cerberus Term Loan was paid in full instead of paid in a mixture of cash and in kind.
|
In connection with the First Amendment to Junior Participation Agreement, the Company issued fully vested warrants to purchase 0.4 million shares of the Company’s common stock (“First Amendment to Junior Participation Agreement Warrants”) to the Ravich Entities, with a five-year term and an exercise price equal to the lesser of the 10-day trailing average closing price of the Company’s common stock as traded on the Nasdaq Stock Market on (i) March 26, 2020 or (ii) six months from March 26, 2020. The 10-day trailing average closing price of the Company’s common stock on the issuance date was $0.72.
The fair value of the First Amendment to Junior Participation Agreement Warrants was calculated using the Black Scholes Model with the following assumptions: contractual life of five years, volatility of 43.8%, dividend yield of 0.00%, and annual risk-free interest rate of 0.5%. The fair value of the First Amendment to Junior Participation Agreement Warrants of $0.1 million was expensed to selling, general, and administrative expense in March 2020.
Amendment to the Junior Participation Agreements – Term C Loan
In May 2020, in connection with, and as a condition to, the Ninth Amendment, certain stockholders of the Company (“Term C Loan Junior Participants”), including Mr. Ravich, entered into, or amended certain Junior Participation Agreements (collectively, “Term C Loan Junior Participation Agreements”) with Cerberus. Pursuant to the Term C Loan Junior Participation Agreements (which was amended and/or restated from time to time), the Term C Loan Junior Participants acquired junior participation interests in the Term C Loan in an aggregate amount of $5.6 million on May 12, 2020 (“Term C Loan”). Mr. Ravich agreed to acquire additional junior participation interests in the Term B Loan in an aggregate amount of (i) $2.5 million on June 30, 2021 and (ii) $2.5 million on September 30, 2021 as long as Term B Loan was outstanding on such date.
The $5.6 million Term C Loan and related accrued interest was convertible, at the option of the Term C Loan Junior Participants, into shares of the Company’s common stock, at a conversion price of $0.54 per share.
The $5.6 million Term C Loan was junior and subordinate to the Cerberus/PNC Debt in all respects and had no quarterly payments. From May 2020 through the Cerberus/PNC Debt Maturity Date, the Term C Loan accrued interest in kind at the same rate per year as the Cerberus Term Loan. Although the Term C Loan was paid off as part of the Cerberus Payoff, the Term C Loan Junior Participants were issued the Convertible Promissory Notes as discussed above, under substantially identical terms as the Term C Loan, except the Convertible Promissory Notes pay interest quarterly and the Term C Loan paid interest at maturity.
.
26
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Summary of the Cerberus/PNC Financing Agreement and Amendments
The Cerberus/PNC Financing Agreement and amendments thereto are summarized below:
Description
|
|
Use of Proceeds
|
|
Origination Date
|
Term Loans:
|
|
|
|
|
Financing Agreement
|
|
Phoenix acquisition
|
|
August 2015
|
First Amendment
|
|
Color Optics acquisition
|
|
July 2016
|
Third Amendment
|
|
Printing Components Business acquisition
|
|
October 2017
|
Fourth Amendment
|
|
Working capital
|
|
November 2018
|
Sixth Amendment (Term B Loan)
|
|
N/A
|
|
December 2019
|
Eighth Amendment (Accreted fees)
|
|
N/A
|
|
March 2020
|
Ninth Amendment (Term C Loan)
|
|
Working capital
|
|
May 2020
|
|
|
|
|
|
Line of Credit:
|
|
|
|
|
Cerberus/PNC Revolver (includes
Second, Fifth, Seventh, Eighth,
and Ninth Amendments)
|
|
Working capital
|
|
August 2015
|
Interest payments were due in arrears on the first day of each month. Quarterly principal payments were due on the last day of each fiscal quarter. Annual principal payments equal to 75% of ALJ’s excess cash flow (“ECF”), as defined in the Cerberus/PNC Financing Agreement, were due annually each December, upon delivery of the annual audited financial statements. The annual ECF calculation, based on results of operations for the years ended September 30, 2020 and 2019, did not require ALJ to make an annual ECF payment in December 2020 or 2019.
In certain instances, ALJ was required to make mandatory term loan payments if ALJ receives cash outside the normal course of business. ALJ made one mandatory payment of $0.9 million in November 2019. No additional mandatory payments were made during any other period covered by this report.
The Cerberus/PNC Debt was secured by substantially all the Company’s assets and imposed certain limitations on the Company, including its ability to incur debt, grant liens, initiate certain investments, declare dividends and dispose of assets. The Cerberus/PNC Debt also required ALJ to comply with certain debt covenants.
Cerberus/PNC Debt - Loan Amendment Fees
ALJ accounted for all Cerberus/PNC Debt amendments as debt modifications pursuant to ASC 470, Debt. ALJ did not pay any Cerberus/PNC Debt loan amendment fees during the three or nine months ended June 30, 2021.
During the three and nine months ended June 30, 2020, ALJ paid $0.2 million and $0.9 million, respectively, of legal and other fees of which $0.1 million and $0.6 million, respectively, were added to deferred loan costs and amortized to interest expense through the Cerberus/PNC Debt Maturity Date. The remaining fees of $0.1 million and $0.3 million were expensed to selling, general, and administrative expense during the three and nine months ended June 30, 2020, respectively.
Equipment Financing
In June 2020, Phoenix purchased a Heidelberg Press for $2.6 million with a $1.8 million equipment financing (“June 2020 Equipment Financing”), $0.5 million cash, and a $0.3 million trade-in allowance. The June 2020 Equipment Financing term was 36 months, required monthly principal and interest payments, accrued interest at 2.66% per year, and was secured by the respective Heidelberg Press.
In March 2021, Phoenix purchased a second Heidelberg Press for $4.5 million with a $3.5 million equipment financing (“March 2021 Equipment Financing” and together with the June 2020 Equipment Financing, the “Equipment Financings”), $0.9 million cash, and a $0.1 million trade-in allowance. The March 2021 Equipment Financing term was 60 months, required monthly principal and interest payments, accrued interest at 4.5% per year, and was secured by the respective Heidelberg Press.
On June 29, 2021, the Equipment Financings were paid in full using proceeds from the Blue Torch Term Loan.
27
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. COMMITMENTS AND CONTINGENCIES
Employment Agreements
ALJ maintains employment agreements with certain key executive officers that provide for a base salary and an annual bonus, with annual bonus amounts to be determined by the Board of Directors or the Chief Executive Officer. The agreements also provide for involuntary termination payments, which includes base salary, performance bonus, medical premiums, stock options, non-competition provisions, and other terms and conditions of employment. On June 30, 2021, contingent termination payments related to base salary and medical premiums totaled $1.1 million.
Surety Bonds
As part of Faneuil’s normal course of operations, certain customers require surety bonds guaranteeing the performance of a contract. On June 30, 2021, the face value of such surety bonds, which represents the maximum cash payments that Faneuil’s surety would be obligated to pay under certain circumstances of non-performance, was $41.5 million. To date, Faneuil has not made any non-performance payments to any of its sureties.
Letters of Credit
The Company had letters of credit totaling $3.3 million outstanding on June 30, 2021.
Litigation, Claims, and Assessments
Faneuil, Inc. v. 3M Company
On September 22, 2016, Faneuil filed a complaint against 3M Company (“3M”) in the Circuit Court for the City of Richmond, Virginia (the “Richmond Circuit Court”). The dispute arose out of a subcontract entered into between 3M and Faneuil in relation to a toll road project in Portsmouth, Virginia. In its complaint, Faneuil sought recovery of $5.1 million based on three causes of action: breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment.
On October 14, 2016, 3M filed its answer and counterclaim against Faneuil. In its counterclaim, 3M sought recovery in excess of $10.0 million based on three claims: breach of contract/indemnification, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. 3M’s counterclaim alleged it incurred approximately $3.2 million in damages as a result of Faneuil’s conduct and sought indemnification of an additional $10.0 million in damages incurred as a result of continued performance.
The matter was tried in a bench trial from April 30, 2018 through May 2, 2018. On May 15, 2018, the Richmond Circuit Court issued its opinion, which dismissed both Faneuil’s complaint and 3M’s counterclaim with prejudice. No monetary damages were awarded to either Faneuil or 3M. As a result of the Richmond Circuit Court’s opinion, ALJ recorded a non-cash litigation loss of $2.9 million (the outstanding unreserved receivable from 3M), which was included in selling, general, and administrative expense during the year ended September 30, 2018. The matter was appealed to the Supreme Court of Virginia where Faneuil was awarded approximately $1.2 million, plus pre- and post-judgment interest. The matter was remanded to the trial court for calculation of interest and entry of final judgment. Faneuil and 3M settled on the amount of interest to be paid. The final judgment plus interest, which totaled $1.5 million, was received and recorded by Faneuil in December 2019. Of the total $1.5 million, $1.3 million was booked as a reduction to selling, general, and administrative expense, and $0.2 million was booked to interest from legal settlement on the Statement of Operations during the nine months ended June 30, 2020.
Marshall v. Faneuil, Inc.
On July 31, 2017, plaintiff Donna Marshall (“Marshall”) filed a proposed class action lawsuit in the Superior Court of the State of California for the County of Sacramento against Faneuil and ALJ. Marshall, a previously terminated Faneuil employee, alleges various California state law employment-related claims against Faneuil. Faneuil has answered the complaint and removed the matter to the United States District Court for the Eastern District of California; however, Marshall filed a motion to remand the case back to state court, which has been granted. In connection with the above, an amended complaint was filed by certain plaintiffs to add a claim for penalties under the California Private Attorneys General Act (the “PAGA Claim”). Faneuil demurred to the PAGA Claim and it was eventually dismissed by the trial court.
The parties are currently engaged in limited discovery. A mediation was held on March 11, 2021 and discussions are ongoing. Faneuil believes this action is without merit and intends to defend this case vigorously.
28
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Harris v. Faneuil
Lois Harris, an employee of Faneuil in Georgia, filed a collective action complaint on April 18, 2021 in the United States District Court for the Northern District of Georgia. Harris alleges, on behalf of herself and other current and former non-exempt Call Center Agent employees who received nondiscretionary bonuses for periods in which they worked overtime hours, that Faneuil violated the Fair Labor Standards Act by failing to include nondiscretionary bonuses in the regular rate of pay when calculating the overtime rate for Harris and other similarly-situated persons. Faneuil has engaged counsel to defend it in this action. The Company does not believe the resolution of this complaint will have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.
Other Litigation
The Company has been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company concluded as of June 30, 2021 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.
Environmental Matters
The operations of Phoenix are subject to various laws and related regulations governing environmental matters. Under such laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as investigation of property damage. Phoenix incurs ongoing expenses associated with the performance of appropriate monitoring and remediation at certain of its locations.
10. LEASES
ALJ has operating leases for facilities, equipment, and vehicles, and finance leases for equipment. Over 95% of operating leases are for facilities. Many of the Company’s facilities leases contain renewal options and rent escalation clauses.
The Company determines if an arrangement is a lease at inception and recognizes a finance or operating lease liability and right-of-use asset in the Company’s Consolidated Balance Sheet. Right-of-use assets and lease liabilities for both operating and finance leases are recognized based on present value of lease payments over the lease term at commencement date.
In instances where the lease does not provide an implicit rate, the Company estimates an incremental borrowing rate (“IBR”) based on the information available at commencement date to determine the present value of lease payments. ALJ does not have a published credit rating because it has no publicly traded debt. However, the Company does have several privately held debt instruments that were taken into consideration. The Company generates its IBR, using a synthetic credit rating model that estimates the likelihood (probability) of a borrower receiving a given credit rating based on relevant credit factors or predictor variables. It is based on a regression analysis using selected financial ratios of publicly traded industry comparable companies and the companies’ credit ratings. The estimated IBR is then adjusted for (i) the length of the lease term, and (ii) the effect of designating specific collateral with a value equal to the unpaid lease payments. Finally, ALJ applies the estimated IBR on a lease-by-lease basis as each lease has different start and end dates and has different assumptions regarding purchase or renewal options.
For facilities leases, ALJ accounts for non-lease components such as maintenance, taxes, and insurance, separately. For equipment leases, ALJ accounts for lease and non-lease components as a single lease component. The difference between the operating lease right-of-use assets and operating lease liabilities primarily relates to adjustments for deferred rent and tenant improvement allowances.
29
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the location of the ROU assets and liabilities in the Consolidated Balance Sheet and ALJ’s weighted-average lease term and discount rate:
(dollars in thousands)
|
|
As of June 30, 2021
|
|
Finance Leases:
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
1,575
|
|
Less accumulated amortization
|
|
|
(392
|
)
|
Property and equipment, net
|
|
$
|
1,183
|
|
Finance lease obligations, current portion
|
|
$
|
810
|
|
Finance lease obligations, less current portion
|
|
|
540
|
|
Total finance lease liabilities
|
|
$
|
1,350
|
|
Operating Leases:
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
30,736
|
|
Operating lease obligations - current installments
|
|
$
|
5,035
|
|
Operating lease obligations, less current installments
|
|
|
34,432
|
|
Total operating lease obligations
|
|
$
|
39,467
|
|
Weighted average remaining lease term (years):
|
|
|
|
|
Finance
|
|
|
1.7
|
|
Operating
|
|
|
7.0
|
|
Weighted average discount rate:
|
|
|
|
|
Finance
|
|
|
0.0
|
%
|
Operating
|
|
|
10.6
|
%
|
The following table presents the components of lease cost and the location of such cost in ALJ’s Consolidated Statements of Operations:
(in thousands)
|
|
Statement of Operations Location
|
|
Three Months Ended June 30, 2021
|
|
|
Nine Months Ended June 30, 2021
|
|
Finance Leases:
|
|
|
|
|
|
|
|
|
|
|
Amortization of finance lease assets
|
|
Selling, general, and administrative expense
|
|
$
|
189
|
|
|
$
|
696
|
|
Amortization of finance lease assets
|
|
Cost of revenue
|
|
|
115
|
|
|
|
343
|
|
Interest on finance lease liabilities
|
|
Interest expense
|
|
|
74
|
|
|
|
162
|
|
Total finance lease cost
|
|
|
|
|
378
|
|
|
|
1,201
|
|
Operating Leases:
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
Selling, general, and administrative expense
|
|
|
1,724
|
|
|
|
5,207
|
|
Operating lease cost
|
|
Cost of revenue
|
|
|
319
|
|
|
|
957
|
|
Variable lease cost
|
|
Selling, general, and administrative expense
|
|
|
220
|
|
|
|
719
|
|
Short-term lease cost
|
|
Selling, general, and administrative expense
|
|
|
10
|
|
|
|
28
|
|
Total operating lease cost
|
|
|
|
|
2,273
|
|
|
|
6,911
|
|
Total lease cost
|
|
|
|
$
|
2,651
|
|
|
$
|
8,112
|
|
The following table presents supplemental cash flow information related to leases:
(In thousands)
|
|
Nine Months Ended June 30, 2021
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows used for finance leases
|
|
$
|
162
|
|
Operating cash flows used for operating leases - continuing operations
|
|
|
3,750
|
|
Financing cash flows used for finance leases
|
|
|
3,987
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
|
576
|
|
Finance leases
|
|
|
—
|
|
30
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Maturities of lease liabilities as of June 30, 2021 are as follows (in thousands):
Year Ending June 30,
|
|
Finance
Leases
|
|
|
Operating
Leases
|
|
2022
|
|
$
|
810
|
|
|
$
|
8,875
|
|
2023
|
|
|
540
|
|
|
|
8,136
|
|
2024
|
|
|
—
|
|
|
|
7,399
|
|
2025
|
|
|
—
|
|
|
|
7,071
|
|
2026
|
|
|
—
|
|
|
|
7,012
|
|
Thereafter
|
|
|
—
|
|
|
|
18,221
|
|
Total lease payments
|
|
|
1,350
|
|
|
|
56,714
|
|
Less: imputed interest
|
|
|
—
|
|
|
|
(17,247
|
)
|
Total present value of lease payments
|
|
$
|
1,350
|
|
|
$
|
39,467
|
|
|
|
|
|
|
|
|
|
|
Reported as of June 30, 2021:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
810
|
|
|
$
|
5,035
|
|
Non-current
|
|
|
540
|
|
|
|
34,432
|
|
Total
|
|
$
|
1,350
|
|
|
$
|
39,467
|
|
11. EQUITY
Common Stock Activity during the Nine Months Ended June 30, 2021
ALJ issued 23,256 shares of common stock upon the cashless exercise of stock options.
Common Stock Activity during the Nine Months Ended June 30, 2020
ALJ did not have any common stock activity during the nine months ended June 30, 2020.
Equity Incentive Plans
ALJ’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.
Stock-Based Compensation.
The following table sets forth the total stock-based compensation expense included in selling, general, and administrative expense on the Statements of Operations:
|
|
Three Months Ended
June 30,
|
|
|
Nine Months Ended
June 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Stock options
|
|
$
|
15
|
|
|
$
|
61
|
|
|
$
|
47
|
|
|
$
|
229
|
|
Common stock awards
|
|
|
26
|
|
|
|
28
|
|
|
|
79
|
|
|
|
83
|
|
Total stock-based compensation expense
|
|
$
|
41
|
|
|
$
|
89
|
|
|
$
|
126
|
|
|
$
|
312
|
|
On June 30, 2021, ALJ had less than $0.1 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.5 years.
Stock Option Awards.
ALJ did not issue any option grants during the three or nine months ended June 30, 2021.
In May 2020, ALJ issued one option grant to purchase 150,000 shares of ALJ common stock with a total estimated fair value of less than $0.1 million. ALJ estimated the fair value of the option on the grant date using the Black-Scholes valuation model under the following assumptions: weighted average expected option life of 6.2 years, weighted average expected volatility of 47.8%, expected dividend yield of 0%, and weighted-average risk-free interest rate of 0.34%.
31
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALJ had 110,000 option forfeitures during the three months ended June 30, 2021, and 360,000 option forfeitures during the nine months ended June 30, 2021. ALJ had no option forfeitures during the three or nine months ended June 30, 2020.
The “intrinsic value” of options is the excess of the value of ALJ stock over the exercise price of such options. The total intrinsic value of options outstanding (of which all are vested or expected to vest) was less than $0.1 million on June 30, 2021.
Common Stock Awards. Members of ALJ’s Board of Directors receive a director compensation package that includes an annual common stock award. In connection with such awards, ALJ recorded stock-based compensation expense of less than $0.1 million for both the three months ended June 30, 2021 and June 30, 2020, and $0.1 million for both the nine months ended June 30, 2021 and June 30, 2020.
Common Stock Options and Warrants Outstanding on June 30, 2021
On June 30, 2021, ALJ had 1.4 million stock options with a weighted average exercise price of $3.56 outstanding and warrants exercisable to purchase 2.9 million shares of common stock with a weighted average exercise price of $1.11 outstanding.
12. INCOME TAX
ALJ recorded a provision for income taxes of $0.4 million and $0.3 million for the three months ended June 30, 2021 and 2020, respectively, which was attributable to continuing operations. ALJ recorded a provision for income taxes of $0.7 million and a benefit from income taxes of $1.0 million for the nine months ended June 30, 2021 and 2020, respectively, which was attributable to continuing operations. ALJ’s effective tax rate for the nine months ended June 30, 2021 was (18.3%), as a result of generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. ALJ’s effective tax rate for the nine months ended June 30, 2020 was 2.5%, which was also due to generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. The decrease in ALJ’s effective tax rate was attributable to a decrease in forecasted pre-tax losses, as well as changes to the valuation allowance recorded against net deferred tax assets.
ALJ did not record a provision for or benefit from income taxes for discontinued operations during any period presented.
13. REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION
Reportable Segments
As discussed in Note 1, ALJ has organized its business along two reportable segments (Faneuil and Phoenix), together with a corporate group for certain support services. ALJ’s operating segments are aligned on the basis of products, services, and industry. The Chief Operating Decision Maker (“CODM”) is ALJ’s Chief Executive Officer. The CODM manages the business, allocates resources to, and assesses the performance of each operating segment using information about its net revenue and segment adjusted EBITDA. ALJ defines segment adjusted EBITDA as segment net income (loss) before depreciation and amortization expense, interest expense, litigation loss, recovery of litigation loss, restructuring and cost reduction initiatives, loan amendment expenses, fair value of warrants issued in connection with loan amendments, stock-based compensation, acquisition-related expenses, gain on disposal of assets, net, income taxes, loss on debt extinguishment, and other non-recurring items. Such amounts are detailed in our segment reconciliation below. The accounting policies for segment reporting are the same as for ALJ as a whole.
32
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables present ALJ’s segment information for the three and nine months ended June 30, 2021 and June 30, 2020:
|
|
Three Months Ended June 30, 2021
|
|
(in thousands)
|
|
Faneuil
|
|
|
Phoenix
|
|
|
ALJ
|
|
|
Consolidated
|
|
Net revenue
|
|
$
|
72,754
|
|
|
$
|
30,706
|
|
|
$
|
—
|
|
|
$
|
103,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment adjusted EBITDA -
continuing operations
|
|
$
|
3,731
|
|
|
$
|
5,476
|
|
|
$
|
(1,456
|
)
|
|
$
|
7,751
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,944
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,623
|
)
|
Loss on debt extinguishment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,072
|
)
|
Change in fair value of contingent
consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,100
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(383
|
)
|
Bank fees accreted to term loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
Restructuring and cost reduction
initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
Loan amendment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Gain on disposal of assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,504
|
)
|
|
|
Nine Months Ended June 30, 2021
|
|
(in thousands)
|
|
Faneuil
|
|
|
Phoenix
|
|
|
ALJ
|
|
|
Consolidated
|
|
Net revenue
|
|
$
|
243,147
|
|
|
$
|
86,038
|
|
|
$
|
—
|
|
|
$
|
329,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment adjusted EBITDA -
continuing operations
|
|
$
|
12,372
|
|
|
$
|
14,774
|
|
|
$
|
(4,076
|
)
|
|
$
|
23,070
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,912
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,656
|
)
|
Loss on debt extinguishment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,072
|
)
|
Change in fair value of contingent
consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,100
|
)
|
Bank fees accreted to term loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(719
|
)
|
Restructuring and cost reduction
initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(288
|
)
|
Loan amendment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126
|
)
|
Gain on disposal of assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,643
|
)
|
Net loss from discontinued
operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,063
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,706
|
)
|
33
ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Three Months Ended June 30, 2020
|
|
(in thousands)
|
|
Faneuil
|
|
|
Phoenix
|
|
|
ALJ
|
|
|
Consolidated
|
|
Net revenue
|
|
$
|
61,523
|
|
|
$
|
24,554
|
|
|
$
|
—
|
|
|
$
|
86,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment adjusted EBITDA -
continuing operations
|
|
$
|
4,263
|
|
|
$
|
3,761
|
|
|
$
|
(906
|
)
|
|
$
|
7,118
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,800
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,568
|
)
|
Change in fair value of
contingent consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900
|
)
|
Restructuring and cost reduction
initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(649
|
)
|
Bank fees accreted to term loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300
|
)
|
Benefit from income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89
|
)
|
Loan amendment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
Gain on disposal of assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,198
|
)
|
Net loss from discontinued operations,
net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(461
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,659
|
)
|
|
|
Nine Months Ended June 30, 2020
|
|
(in thousands)
|
|
Faneuil
|
|
|
Phoenix
|
|
|
ALJ
|
|
|
Consolidated
|
|
Net revenue
|
|
$
|
178,915
|
|
|
$
|
73,331
|
|
|
$
|
—
|
|
|
$
|
252,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment adjusted EBITDA -
continuing operations
|
|
$
|
7,288
|
|
|
$
|
10,779
|
|
|
$
|
(2,855
|
)
|
|
$
|
15,212
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,492
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,675
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,976
|
)
|
Restructuring and cost reduction
initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,440
|
)
|
Change in fair value of
contingent consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900
|
)
|
Fair value of warrants issued in
connection with loan amendments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(716
|
)
|
Loan amendment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(475
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(312
|
)
|
Bank fees accreted to term loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300
|
)
|
Acquisition-related expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
Interest from legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Gain on disposal of assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299
|
|
Recovery of litigation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,256
|
|
Benefit from income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,008
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,410
|
)
|
Net loss from discontinued operations,
net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,324
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(68,734
|
)
|
Geographic Information
Substantially all of the Company’s assets were located in the United States. Substantially all of the Company’s revenue was earned in the United States.
34